GOPideas... ideas done right

Recently Democrats have been making the argument that was made here last month: If government is so terribly inefficient, and the private market so efficient and competitive, then why would the private market be fearful of a bloated and inefficient competitor entering the health care marketplace?

The answer is cross-subsidization. In essence, cross-subsidization occurs when an entity with a predictable stream of cash flows invests those cash flows to operate additional entities at a loss. This is called predatory pricing: pricing a good or service at or below the cost of providing that service, ensuring that any other competitor will be driven from the market because they cannot earn an acceptable return on their investment. Predatory pricing is exactly the strategy that Obamacare would dictate by using tax revenue to subsidize coverage and price it below the point at which private competitors would compete.

The reason why Republicans have been unable to make this connection is due to team Obama's brilliance in obfuscating their true intentions by hiding the real costs of the program in obscure details and administrative-sounding language that most policy analysts miss. (However, since the health care work is done in Congress, it is not nearly as brilliantly obfuscatory as their foreclosure plan.) Instead of focusing on the theoretical economics of health reform, here are the steps to universal, single payer health care --- from the consumer perspective.

The most important issue is the price of the "pay or play" employer mandate that requires employers to either provide health insurance or pay a fine. The current price is $750 per year --- which is far below what employers pay for insurance --- currently over $12,000.  If you are an employer, would you rather pay $750 to the government as a "fine" or $12,000 to a private firm? For the overwhelming number of employers, this is an easy decision --- the employer has huge incentives to drop coverage, provided that the fine is less than what the employer currently pays. What is even more insidious is that the employer can pitch the change as a "win" for workers. For example, the employer can tell employees that the savings will be split between employer and employee --- under the current $750 "fine" this would result in an approximate $5,000 increase in pay for workers dropped from their company health plan: a "win-win."

As my best economics teacher taught me: whenever a politician proclaims that under a certain policy everyone wins, you know they are lying because someone is going to lose --- because someone is benefiting from the current system. Specifically, since over 70% of people rate the care they receive as 8 or better (on a scale of 10) --- the largest potential losers are those currently ensured. From an economic perspective, as people drop off the rolls of private insurers and move to the government plan, the cost to those remaining within the plan will rise. (Without a complex explanation, larger companies can provide insurance more cheaply because of economies of scale and a distributed risk pool, as the pool gets smaller, advantages diminish and costs rise.) Thus, as more people enter the "public option," the higher the "penalty" for a firm to retain a private insurance plan. (Read: the idea that employees will be able to "keep their current plan" is bunk because it will be too profitable for employers to drop coverage.)

More people will be getting insurance (many of which will be receiving additional public subsidies) and employers will be paying less into the system ($12,000 vs. $750) --- meaning the additional costs must be borne elsewhere (unless care is rationed or prices fixed). This means costs MUST rise --- and be borne by taxpayers. This is the "stuff the beast" play: get people to love government health care because it's the same quality of care for less money, with the costs hidden in the deficit --- and assume people will not care who is paying. 

Invariably, costs will continue to rise and the debt will be unsustainable, leading to the same choice we now face for entitlements: cut benefits, raise taxes or increase the deficit --- with increase the deficit off the table when the bill comes due. We know which way the politicians will go, seeing as though Medicare originally cost $3 billion per year and was estimated to rise to $12 billion by 1990. (Actual cost in 1990: $107 billion, 2008 cost: $325 billion). Thus, the public option makes health care an entitlement today --- to be paid for by taxes tomorrow.